The world of personal finance and retirement planning can seem complicated at times, but when it comes to dealing with a 401(k) account from a previous employer, there are typically four options to consider.
If you’ve recently changed jobs or are looking to consolidate your retirement accounts, here’s an overview of your choices:
1. ROLL THE ASSETS INTO YOUR NEW EMPLOYER'S PLAN
- PROs: Managing all of your retirement assets in one place offers simplicity, making it easier to track your progress toward your retirement goals.
- CONs: Not all employers will accept a rollover from another plan, so be sure to ask your new 401(k) plan administrator about any applicable rules or restrictions.
2. LEAVE THE MONEY IN YOUR OLD EMPLOYER'S PLAN.
- PROs: If you like the investment options your old plan offers, leaving money where it is will allow you to continue with that investment strategy.
- CONs: Some employers require a minimum account balance to keep assets in the plan. Plus, your withdrawal options may be limited once you're no longer actively contributing to the account. (You may not be able to take a loan or partial withdrawal, for example.)
3. ROLL THE ASSETS INTO AN IRA.
- PROs: An IRA generally offers access to a wider variety of investment options compared with typical employer plans. In addition, if you're under age 59.5, IRAs allow you to take a penalty-free withdrawal for first time home purchases or qualified education expenses.
- CONs: You may face additional or higher account expenses, such a trading charges or annual fees. IRAs also offer less creditor protection under federal law than 401(k) accounts.
4. CASH OUT THE ACCOUNT.
- PROs: Although financial planners may consider this a last resort option, taking your balance in cash gives you flexibility in using the funds - for example, if you need to pay for unexpected expenses or make a large purchase.
- CONs: Cashing out your 401(k) will reduce your retirement savings, and you will have to pay federal (and possibly state) taxes on the money you withdraw, as well as an additional 10-percent penalty if you're under are 59.5. It's best to explore all other options, including a home equity loan, before you cash out your 401(k) savings.
If you have questions about what to do with an old 401(k), please reach out to me. Together we can discuss your options and determine what may be best for you.
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